T.C. Memo. 1996-99
UNITED STATES TAX COURT
S. PAUL AND PATRICIA J. DUBOSE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10831-94. Filed March 5, 1996.
Leslie L. McCollom (specially recognized), for petitioner
Patricia J. Dubose.
S. Paul Dubose, pro se.
Franklin R. Hise, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined deficiencies, additions
to tax, and penalties with respect to petitioners’ Federal income
taxes as follows:
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Additions to Tax and Penalties, I.R.C.
Sec. 6653(b)(1) or
Year Deficiency Sec. 6653(b)(1)(A) Sec. 6653(b)(1)(B) Sec. 6663(a)
1
1986 $ 59,557 $ 39,320 --
1
1987 228,770 168,588 --
1988 18,118 11,724 -- --
1989 23,688 -- -- $15,733
1990 14,834 -- -- 11,126
__________________________
1
50% of the interest due on the portion of the underpayment that is
attributable to fraud.
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the years in issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure. Prior to trial, petitioner Patricia J. Dubose
(Mrs. Dubose) and respondent entered into an agreement in which
Mrs. Dubose conceded the deficiencies determined by respondent
and respondent conceded that Mrs. Dubose is not liable for the
additions to tax or penalties for fraud. S. Paul Dubose
(petitioner) failed to appear for trial, and respondent orally
moved to dismiss his petition for lack of prosecution as to those
issues upon which petitioner has the burden of proof. Respondent
proceeded to present evidence that the deficiencies for the years
in issue are due to fraud on the part of petitioner.
FINDINGS OF FACT
Petitioners resided in Blanco, Texas, at the time that they
filed their petition. Petitioners were married and filed joint
Federal income tax returns for each of the years in issue.
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Petitioner was born in 1930. He received a bachelor of
science degree in economics. In or about 1977, petitioner and
John P. Stern (Stern) commenced a wood floor manufacturing and
distribution company known as Kentucky Wood Floors, Inc.
(Kentucky Wood). Each invested $31,000 and received 31,000
shares of stock. Mrs. Dubose subsequently received stock in
Kentucky Wood. During 1981, a partnership known as Kywood
Investments, Ltd. (Kywood), was formed among petitioners, Stern,
and other investors to purchase the building that housed Kentucky
Wood. Mrs. Dubose held her partnership interest in her name.
Petitioner’s partnership interest in Kywood was held through a
corporation known as Dubose Properties, Inc., d/b/a International
Telecommunications (the corporation). The corporation had no
assets other than its partnership units in Kywood.
In 1986 and 1987, Kentucky Wood repurchased the stock and
partnership interests owned by petitioners and by the
corporation. As a result of this sale of their interests,
petitioners received net capital gains in 1986, 1987, and 1988 in
the amounts of $124,599, $503,684, and $560, respectively.
Petitioners reported only $15,498.38 in 1986 and $181.26 in 1987
from the sale of their interests in these entities. Petitioners
also received interest and/or dividend income of $1,016 in 1986,
$226,851 in 1987, $60,934 in 1988, $77,243 in 1989, and $53,097
in 1990, which was not reported on their returns for those years.
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On September 26, 1986, Kentucky Wood issued a check payable
to petitioner in the amount of $47,880 for the purchase of 2,000
shares of petitioner’s stock in Kentucky Wood. Petitioner
returned the check to Stern and requested that the check be
reissued and made payable to the Church of the New Age.
Petitioner also instructed Stern to make all subsequent payments
for the purchase of petitioner’s stock payable to the Church of
the New Age.
On December 8, 1986, petitioner directed B.F. Pitman III
(Pitman) to open a bank account in the name of the Church of the
New Age. Pitman was a member of the board of directors of a bank
in San Antonio, Texas, where the account was opened. Pitman had
sole signature authority on the account, but thereafter Pitman
made deposits, withdrew funds, and handled mail in the name of
the Church of the New Age solely at the direction of petitioner.
The following payments for petitioner’s stock in Kentucky
Wood were deposited into the account in the name of the Church of
the New Age:
Date of Payment Amount
Dec. 1, 1986 $ 47,880.00
Dec. 1, 1986 236,886.30
Sept. 25, 1987 450,618.30
Also on September 25, 1987, a check was issued by Kentucky Wood
to “Church of the New Age and International Telecommunications”
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in payment of the corporation’s interest in Kywood. That check
was also deposited into the account of the Church of the New Age.
On September 25, 1987, Kentucky Wood issued a check payable
to Mrs. Dubose in the amount of $61,319.61 as payment for 2,693
shares of her stock in Kentucky Wood. On October 29, 1987, at
petitioner’s direction, that check was deposited into a new
interest-bearing checking account in the name of Earth Harmony
Church. Also on September 25, 1987, a check in the amount of
$17,773.80 was issued by Kentucky Wood to Mrs. Dubose in payment
of her remaining partnership interest in Kywood. This check was
also deposited into the Earth Harmony Church account.
On April 22, 1988, petitioners opened a checking account in
the name of the Church of the Golden Rule. In 1988 and 1989,
petitioners transferred $275,000 from the bank account of the
Church of the New Age to the bank account of the Church of the
Golden Rule. Petitioners had signature authority on the Church
of the Golden Rule account and used the funds in that account to
make personal investments and to pay personal expenses.
Petitioner’s purpose in depositing funds into bank accounts
in the name of the Church of the New Age, the Earth Harmony
Church, and the Church of the Golden Rule was to avoid income tax
on the sale of petitioners’ interests in Kentucky Wood
and in Kywood and to avoid paying tax on income earned on the
proceeds of sale. To further that purpose, petitioner made
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misrepresentations concerning his income and assets to his tax
return preparers and to Internal Revenue Service (IRS) agents who
subsequently examined petitioners’ tax returns. Petitioner
failed to file corporate returns reflecting gains from sale of
the corporation’s interest in Kywood. On September 13, 1993,
petitioner entered a plea of guilty, and, on September 17, 1993,
he was adjudged guilty of violation of section 7201, tax evasion,
for his taxable year 1989.
OPINION
When the case was called for trial, respondent moved the
Court to dismiss for lack of prosecution those issues upon which
petitioner has the burden of proof and to sustain the
deficiencies determined by respondent. Those deficiencies
resulted from the unreported income described above that is the
basis for respondent’s determination of fraud, as well as
disallowed farm losses and other adjustments. Petitioner has the
burden of proving entitlement to the disallowed deductions and
that the determinations by respondent, other than the
determinations of additions to tax and penalties for fraud, are
erroneous. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S.
79, 84 (1992); Welch v. Helvering, 290 U.S. 111 (1933); New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). By
reason of his failure to appear for trial, to present evidence on
those issues, or otherwise properly to prosecute this case, those
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issues will be decided against petitioner. Rules 123(a) and (b),
142(a), 149.
Respondent, however, bears the burden of proving fraud by
clear and convincing evidence. Sec. 7454(a); Rule 142(b). In
this regard, respondent presented evidence that petitioner had
unreported income for each of the years in issue. In the course
of presenting that evidence, respondent also satisfied the burden
that is sometimes associated with determinations of unreported
income. See Portillo v. Commissioner, 932 F.2d 1128, 1133 (5th
Cir. 1991).
The addition to tax for fraud is a civil sanction intended
to safeguard the revenue and to reimburse the Government for the
heavy expense of investigation and for the loss resulting from a
taxpayer’s fraud. Helvering v. Mitchell, 303 U.S. 391, 401
(1938). Respondent has the burden of proving, by clear and
convincing evidence, an underpayment for each year and that some
part of the underpayment was due to fraud. If respondent
establishes that any portion of the underpayment is attributable
to fraud, the entire underpayment is treated as attributable to
fraud and subjected to a 75-percent addition to tax or penalty,
unless the taxpayer establishes that some part of the
underpayment is not attributable to fraud. See sec. 6653(b)(2)
for 1986, 1987, and 1988, and sec. 6663(b) for 1989 and 1990.
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Respondent’s burden with respect to fraudulent intent is met
if it is shown that the taxpayer intended to conceal, mislead, or
otherwise prevent the collection of taxes owing. See, e.g., Webb
v. Commissioner, 394 F.2d 366, 377 (5th Cir. 1968), affg. T.C.
Memo. 1966-81. Fraud may be proved by circumstantial evidence
because direct proof of the taxpayer’s intent is rarely
available. The taxpayer’s entire course of conduct may establish
the requisite fraudulent intent. Stone v. Commissioner, 56 T.C.
213, 223-224 (1971); Otsuki v. Commissioner, 53 T.C. 96, 105-106
(1969). Fraudulent intent may be inferred from various “badges
of fraud”, including understatement of income, implausible or
inconsistent explanations of behavior, concealing assets, and
failure to cooperate with tax authorities. See Bradford v.
Commissioner, 796 F.2d 303, 307 (9th Cir. 1986); Webb v.
Commissioner, supra at 379; Marcus v. Commissioner, 70 T.C. 562,
577 (1978), affd. without published opinion 621 F.2d 439 (5th
Cir. 1980). A taxpayer’s education may be considered in
determining whether or not he had fraudulent intent. See, e.g.,
Scallen v. Commissioner, 877 F.2d 1364, 1370-1371 (8th Cir.
1989), affg. T.C. Memo. 1987-412.
In this case, respondent has presented clear and convincing
evidence that petitioner had taxable income for each of the years
in issue and that he failed to report substantial amounts of that
income on his returns. There is evidence, and we have found,
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that petitioner concealed income and assets from his tax return
preparers and that he made false and misleading statements to IRS
agents investigating his tax liability. Petitioner’s failure to
come forward with any nonfraudulent explanation negating the
evidence against him justifies the inference that there is no
such explanation. Brooks v. Commissioner, 82 T.C. 413, 432-433
(1984), affd. without published opinion 772 F.2d 910 (9th Cir.
1985). We have found that petitioner’s purpose in placing funds
in church accounts was to avoid paying income tax due on the
proceeds of sale of his stock in Kentucky Wood and the sale of
the corporation’s partnership interest in Kywood. We are
convinced by the evidence that petitioner knew that he could not
avoid taxation merely by placing funds in the names of churches
that he created for that purpose. His attempts to do so
establish fraudulent intent. See Stephenson v. Commissioner, 79
T.C. 995, 1006 (1982), affd. 748 F.2d 331 (6th Cir. 1984). In
any event, for 1989, petitioner is estopped by his criminal
conviction from denying that the underpayment for that year is
due to fraud. Amos v. Commissioner, 360 F.2d 358 (4th Cir.
1965), affg. 43 T.C. 50 (1964); see Tomlinson v. Lefkowitz, 334
F.2d 262 (5th Cir. 1964).
Upon review of the entire record, we conclude that
respondent has satisfied her burden of proving that petitioner
underpaid his taxes for each of the years in issue and that the
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underpayments attributable to unreported income were due to
fraud. Petitioner has not proven that any part of any
underpayment is not attributable to fraud. To reflect the
foregoing,
Respondent’s motion to dismiss
for lack of prosecution as to
petitioner S. Paul Dubose will be
granted and decision will be
entered for respondent and against
petitioner S. Paul Dubose, and
decision will be entered only for
the deficiencies as to petitioner
Patricia S. Dubose.